Cathie Wood is the head of Ark Investment Management, which manages several exchange-traded funds (ETFs) focused on innovative technology companies. Tesla (TSLA 3.34%) The stock is one of the top positions in Ark’s portfolios, and Wood sees it as the world’s largest artificial intelligence (AI) opportunity thanks to the company’s fully autonomous driving (FSD) software.

Tesla currently generates about 79% of its revenue from selling electric passenger vehicles (EVs), but Ark released a set of financial models earlier this year that suggest that figure is about to decline significantly.

In fact, by 2029, Ark predicts that 86% of Tesla’s revenue will come from something else.

Image source: Tesla.

Tesla’s electric vehicle business is currently struggling

When Tesla shares went public in 2010, few analysts believed the company would succeed in mass production. EV. It certainly proved them wrong and delivered a record 1.8 million units in 2023 alone. However, sales are clearly slowing down.

Tesla delivered 1.29 million electric vehicles in the first three quarters of 2024, representing a drop by 2.3% compared to the same period last year. This means its annual deliveries are on track to decline for the first time. since the launch of the flagship model S in 2011 – although the company has slashed prices over the past year to stimulate demand.

Demand is currently slowing in the electric vehicle industry as consumers switch to cheaper gasoline-powered cars amid tough economic conditions, highlighted by high interest rates. In addition, a report of Goldman Sachs suggests that consumers are concerned about the lack of fast charging infrastructureas well as the decline in the resale value of electric vehicles in general.

But Tesla also faces a growing competitive threat, with low-cost manufacturers like those based in China. BYD threatens to flood global markets with cheap electric vehicles. BYD’s Seagull sells for less than $10,000 in China and could be on its way to Europe in 2025. These are important geographic markets for Tesla, and none of its passenger electric vehicles can compete at this level of price.

CEO of Tesla Elon Musk presented his plan to build a low-cost electric vehicle, which is expected to go into production in 2025 and sell for $25,000, but during his conference call with investors for the third quarter of 2024 (ended on September 30), he said the project was no longer in the pipeline.

FSD and robotaxis are the way forward, says Musk

Musk says building a low-cost electric vehicle is “useless” because Tesla’s future lies more in autonomous vehicles. The company unveiled the Cybercab earlier this month, an autonomous robo-taxi without a steering wheel or pedals.

The Cybercab will run on Tesla’s FSD software, which the company has been developing for years. However, it is not yet authorized for unsupervised use in the United States and a human driver must be ready to take over at any time. But based on data collected during extensive beta testing of its electric passenger vehicles, it’s possible that the Cybercab is already safer than the average car on the road.

According to Tesla’s most recent quarterly vehicle safety report, FSD caused one accident every 7 million miles, compared to one accident every 700,000 miles for the average American driver. In other words, FSDs are 10 times safer than human-operated vehicles, statistically speaking, as they exist today.

The software will only get better over time because the AI models on which it is based are constantly learning new data. Tesla is currently building a cluster of 50,000 graphics processing chips (GPUs) of Nvidia to further train FSD. In fact, the company is poised to spend $11 billion on AI data center infrastructure this year for this very purpose.

As a result, Musk expects the software to eventually receive regulatory approval for unsupervised use. He says it could be available in Texas next year, and potentially in California.

FSD could transform Tesla’s economy

Tesla plans to monetize FSD in three main ways:

1. Sell ​​the software to Tesla electric vehicle owners.
2. Paid licensing of the software to other automobile manufacturers.
3. Thanks to a carpooling network built in-house by Tesla, which will allow Cybercabs to transport passengers at any time of the day (like Uberexcept completely driverless).

Owners of Tesla electric vehicles will also be able to lend their FSD-enabled cars to the network to earn additional income, which will be shared with the company. Additionally, the Cybercab will be available for purchase at the expected price of $30,000, so virtually anyone will be able to purchase a fleet and create their own driverless ridesharing network.

All of these revenue streams could generate high profit margins. Software companies, for example, often have a gross profit margin of 80% or more, which is well above Tesla’s current gross margin of 19.8% across its entire portfolio of hardware businesses.

Additionally, Uber paid its drivers a whopping $17.9 billion in the last quarter alone, which was by far its biggest expense. That’s an indication of how much money Tesla could save with an autonomous ridesharing network operating at scale.

Ark’s financial models suggest Tesla will generate $1.2 trillion in annual revenue by 2029, with FSD and Cybercab accounting for 63%. However, thanks to these high profit margins, Ark estimates that these products will represent 86% of a projected $440 billion in earnings before interest, taxes, depreciation and amortization (EBITDA).

Ark’s Forecast Could Be Ambitious and Tesla Stock Is Not Cheap Right Now

Wall Street’s consensus estimate (according to Yahoo) suggests Tesla is on track to generate $99 billion in total revenue in 2024. That means it will have to grow twelve times by 2029 — or at a compound annual rate of 64.7% for the next five years — to reach The arch forecast.

FSD and Cybercab will need to scale quickly for Tesla to grow at this rate, as $99 billion in revenue this year would represent just 2% growth from 2023. In 2025, Wall Street expects growth revenues of only 15%. Simply put, passenger electric vehicle sales alone won’t get the job done.

Additionally, investors must pay a premium price to bet on Tesla’s autonomous future, as its shares currently trade at a steep premium to the broader market. Based on its last 12 months earnings per share of $3.65, its stock is currently at a price/earnings ratio (P/E) of 68.5. It’s more than double the P/E of 32.1 of Nasdaq-100 technological index.

Tesla’s future is incredibly exciting, but according to Musk’s own predictions, the Cybercab won’t enter mass production until 2026. That means the company’s fate will depend on sales of passenger electric vehicles for at least next year. Although Musk believes they could grow up to 30% in 2025, I have my doubts, given that the low-cost model is no longer in use, leaving the brand vulnerable to competitors like BYD.

In summary, Ark might be right about FSD and Cybercab, but its 2029 goal is ambitious. Therefore, it might be best to wait until we receive more information next year before buy Tesla shares. Alternatively, if there is a pullback that brings its P/E ratio back to that of the Nasdaq-100, this could be a good opportunity to take a long-term position.